Sen. Coburn: AMT Elimination Key to Debt Ceiling Deal

A bipartisan group of Senators, known as the "Gang of Six," announced a compromise on raising the debt ceiling that might be supported by the House, Senate and President.

The Gang of Six senators, Mark Warner (D-Va.), Kent Conrad (N.D.), Richard Durbin (D-Ill.), Tom Coburn (R-Okla.), Saxby Chambliss (R-Ga.), and Mike Crapo (R-Idaho), was formed early this year to try to implement the recommendations of President Obama's fiscal commission, also known as the Simpson-Bowles commission.

The commission failed to get the 14 votes necessary to force votes in the House and Senate, and Obama did nothing to promote the commission's plan. The Gang of Six plan is similar to the Simpson-Bowles commission's proposal announced last December.

It would immediately cut $500 billion from the federal budget and reduce deficit spending by $3.7 trillion over the next decade. About $2.7 trillion of deficit reduction would come from spending cuts and reforming Medicaid, Medicare and Social Security. About $1 trillion would come from additional revenue generated by reforming the tax code by eliminating deductions and credits while lowering overall tax rates.

A solid majority of House Republicans have said they will not favor any proposal that increases taxes. An important question regarding the Gang of Six proposal, therefore, is whether it increases taxes-a tricky question to answer. While it lowers tax rates, it also eliminates deductions, which keeps taxes lower for those who are able to take advantage of them. Some taxpayers, therefore, could conceivably pay more in taxes even as their rates are lowered.

The Gang of Six proposal's main sticking point, however, will likely be the elimination of the Alternative Minimum Tax (AMT). Congress originally passed the AMT out of concern that wealthy taxpayers were able to take advantage of so many deductions and credits in the tax code that they were often able to pay less in taxes (as a percentage of their income) than middle-class taxpayers. The AMT put a cap on the amount of deductions that upper class taxpayers could declare. The problem with the AMT, though, is that it was not indexed to inflation. So, over time, the AMT began to hit middle class taxpayers as well, causing them to pay more in taxes.

Congress, then, would pass a “fix” to the AMT so that middle class taxpayers were not effected. Congress was never able to pass a permanent fix, however, because it never had the votes. Instead, it would pass the fix once a year in a separate bill.

Since Congress always fixes the AMT, but never accounts for the fix in their budget, deficits end up larger than they budget for. This year, the Congressional Budget Office offered two different budget scenarios. One, the “alternative fiscal scenario”, that included the AMT fix, along with other measures that Congress usually pass but don't account for in their budgets, such as increasing Medicare payments to doctors and extending the Bush tax cuts, and another that did not include these measures.

Eliminating the AMT altogether would, by itself, increase taxes. The AMT elimination would not be by itself, though. It would be part of a package that eliminates many of the deductions and credits that made the AMT necessary in the first place.

The question for many Republicans, therefore, will be whether the elimination of the AMT along with many tax deductions combined with a lowering of tax rates amounts to a net tax decrease. The answer to that question will depend, in part, on whether these Republicans are comparing the Gang of Six proposal to an alternative in which the Bush tax cuts will expire and the AMT would stay the same. Compared to this alternative scenario, the Gang of Six proposal could be sold a net tax decrease.

Members of the Gang of Six met with 50 Senators Tuesday morning to explain the proposal. Senators of both parties emerged from the meeting with a positive outlook on the proposal. Some, such the Senate's third ranking Republican Lamar Alexander (R-Tenn.) and Sen. Mark Udall (D-Colo.), showed a commitment to the proposal already, with only a broad outline in hand.

“There was palpable relief from folks in that room this morning. Like they were saying, ‘Here’s something we can actually be for',” Warner said.

The Gang of Six proposal shares some similarities with the 'Grand Bargain' that was being worked out between President Obama and Speaker of the House John Boehner (R-Ohio).

“The plan has moved significantly, and it’s where we need to be,” Obama said at a press conference.

Boehner indicated he would be open to the proposal even as the House passed (234-190) its own proposal, “Cut, Cap and Balance” on Tuesday. The bill would cut fiscal year 2012 spending by $111 billion, cap future spending at 18 percent of GDP, and propose a balanced budget amendment to the Constitution.

Rep.'s Michele Bachmann (R-Minn.) and Ron Paul (R-Texas), both of whom are running for president, voted against the bill along with seven other Republicans. Bachmann said the bill does not go far enough because it does not repeal “Obamacare.”

In a surprise to many in their caucus, five Democrats, Heath Shuler (N.C.), Dan Boren (Okla.), Jim Matheson (Utah), Mike McIntyre (N.C.), and Jim Cooper (Tenn.), voted in favor of Cut, Cap, and Balance.

Cut, Cap, and Balance is unlikely to come up for a vote in the Senate, and would have slim chances of passage if it did.

The breakthrough for the Gang of Six compromise came when Coburn rejoined the group after leaving last May. Coburn was promised an additional $100 billion worth of savings in Medicare reforms.

In a Wednesday interview on CNN, Coburn was asked if the Gang of Six proposal could pass the House.

“The net effect of [the Gang of Six] proposal will be no increase in taxes because the AMT is totally eliminated. So if you were to do it on just what the law is today, not a baseline or anything else, what you would say is there will be about $1 trillion in increased revenue coming into the federal government through economic growth associated with lowering the tax code, but there will also be $1.8 trillion that won't come to [the federal government] through the elimination of the AMT,” Coburn said.

Obama is meeting with Democratic leaders in the White House Wednesday afternoon, followed by meetings with Republican leaders at 5:00pm to discuss the debt ceiling.